Upstart Restaurants are Increasingly Attractive to Savvy Investors

Private equity firms are pouring unprecedented amounts of capital into start-up restaurant chains, heralding a recognition of the restaurant industry as representing a newfound stability in the face of shrinking returns on retail and uncertainty in tech.

“The industry has been more stable than it used to be,” says Greg Dollarhyde, a seasoned private equity investor with multiple restaurant investments, including Zoe’s Kitchen, which in 2007 had only 20 locations but by 2014 was valued at $276 million.

While in the past the restaurant industry was regarded by investors as cyclical and unstable, in today’s climate, it is seen as far less risky in its relative immunity to the destabilizing forces of online selling that threaten to render traditional retail obsolete. In this sense, restaurants are an increasingly robust investment for the mere reason that people quite literally like to “go out to eat.”

The withdrawal or withholding of investment capital from traditional retail means that there are huge sums of money available for investment in other industries, and consumer-oriented private equity firms are finding the restaurant industry to be an unusually safe and lucrative bet.

Private equity firms are more often eschewing the higher prices for big, more established chains, making them more likely to focus on smaller concept restaurants in their quest to generate returns.

Upstart restaurant chains are particularly desirable to private equity firms who are putting their money to work by going “down market” to invest in smaller concepts that can be nurtured and then “flipped,” allowing the investor to move onto to another investment.

Upstarts represent growth companies, which Dollarhyde says are hard to find in today’s investment climate. “High tech is risky and hard to call, and when it gets past a tipping point, the big money already controls it, and you only get in if you are in the club,” says Dollarhyde. In restaurants, the tipping point can be in a city or small region and the growth bet is taking it to new markets.”

Another shifting aspect of the investment world is the way that the restaurant industry is evolving. The explosion of fast-casual chains – informal dining establishments that offer upscale food with expedited service in a pleasing atmosphere – have proven to be an innovatively disruptive force. Technology is a key piece of this in that upstart chains are far more likely than their established counterparts to be technologically savvy and to rely on the advanced analytics that allow restaurants to analyze, understand, predict, and replicate the trends that drive the highest ROI.

The accelerating interest in fast-casual is attested to by a report by Jonathan Maze, Executive Editor at Restaurant Business Magazine, where he noted that “Two thirds of the [investment] deals over the past five years involved concepts we’d label fast casual. There were still a healthy number of investments in casual dining chains, however, proving that investors will put money into ideas they consider to be strong.”

At Marketing Vitals, we’re industry leaders in helping restaurants of all sizes and kinds implement the advanced analytics that drive ROI and make them that much more desirable to savvy investors. Contact us today and see how we can help you optimize your menu, incentivize your staff, streamline your operations, and much, much more.